Wall St. and Business Wednesdays: Black Partnership Alleges Discrimination In SBIC Turndown; SBA Denies It by The Minority Business Insider

An apparently unprecedented lawsuit filed in late 2003, accusing the Small Business Admin. of racial discrimina¬tion when it refused to license Atlanta-based Diamond Ventures LLC as a small business investment company, moves slowly toward a hearing on the merits. Plaintiffs seek about $100 million in lost profits and court costs.

SBA denies it discriminated against the black-controlled partnership and three times has refused the trial court judge’s order to disclose to the principals in Diamond Ventures information about other applicants for SBIC licenses. SBA has appealed those orders to the U.S. Circuit Court of Appeals for the District of Columbia.

Earl Peek and Lonnie Saboor, both black, are the principals of Diamond Ventures, organized in June 2001. The principals planned to apply for an SBIC license.

Saboor is the director of loan programs for the Atlanta Development Authority and Peek worked with Saboor for seven years as a senior loan officer.

To apply for an SBIC license, potential applicants must convince SBIC program personnel to invite them for an interview.

The process involves informal discussions, the submission of a detailed management-assessment questionnaire that typically is about 100 pages, and review by SBIC program staff.

If an applicant is invited to apply, SBA issues a “go forth” letter, which is an invitation to submit a formal application. If licensed, the new SBIC raises the necessary capital and opens for business. Part of the capital is raised by issuance of debentures or participating securities guaranteed by SBA. The PS program was not funded in FY 2006 because of large losses (MBI, 05/08p6).

Diamond Ventures initially approached SBA in December 2001 with a proposal to obtain a PS license as a joint venture. SBA advised Diamond Ventures to not apply as a joint venture so an amended MAQ was submitted February 2002.

The partners were rejected formally for an interview in July 2002 and were told their experience in economic development lending is not sufficiently similar to SBIC activity to meet the minimum requirements of the program.

The partners complained to the SBA Office of Inspector General, which found (Advisory Memorandum Report 3-17) SBIC program officials didn’t use appropriate policies, procedures and criteria in evaluating Diamond Ventures and recommended the case be reconsidered.

Ronald Bew, then associate deputy SBA administrator for capital access, strongly disagreed with the findings but did agree to examine a revised MAQ Diamond Ventures says it submitted in October 2002.

That was formally rejected in February 2003 in a letter signed by Jeffrey Pierson, Bew’s successor. Diamond Ventures attempted to file an administrative charge of discrimination but an administrative judge in June 2003 ruled he had no jurisdiction to hear it. The lawsuit was filed Dec. 6, 2003.

The lawsuit alleges SBIC program personnel “have intentionally treated African American managers and SBIC applicants that they control less favorably than they have treated non-black managers and SBIC applicants con trolled by non-black managers. They have treated African American managers and the entities they control less favorably because of race.”

In addition, the suit charges, SBIC program personnel declined to invite Diamond Ventures to apply for a license because its plan was to invest in inner-city low-income areas with high black populations.

SBA denies all allegations of racial discrimination.

But Judge Gladys Kessler of the U.S. District Court for the District of Columbia has not heard the merits of the case because SBA and Diamond Ventures disagree on the terms the approximately 300 MAQs on file at SBA should be released. SBA agrees Diamond Ventures deserves access to the MAQs, which would permit a determination of whether its MAQ was deficient or not when compared with those of applicants who were licensed.

SBA argues Peek and Saboor should not be allowed to analyze the MAQs because it would give them access to competitive information. Judge Kessler says this is not the case because SBICs do not compete against each other.

In a brief filed Jan. 30 with the appeals court, SBA says the information contained in the MAQs would give Peek and Saboor access to other companies’ business strategies, points of contact and referral sources that generate investment tips and opportunities, and investor lists.

SBA is willing to let plaintiffs’ attorneys review the MAQs but plaintiffs say they would have to hire costly outside experts to assist in the analysis.

This article appeared in the March 2006 issue of The Minority Business Insider, an independent news service published monthly. Copyright 2006 by CD Publica¬tions.